Student Name: Instructor

Class: McGraw-Hill/Irwin
Problem 07-02
OSAGE FARM SUPPLY
Corrected bank reconciliation for November
Balance per bank statement, November 30
Add: Deposit in transit
Subtotal
Less: Outstanding checks:
no. 8231
no. 8263
no. 8288
no. 8294
Total outstanding checks
Adjusted cash balance per bank statement
Balance per accounting records
Add: Note receivable collected by bank
Subtotal
Less: NSF check returned
Bank service charges
Adjusted cash balance per accounting records
prior to recognition of cash shortage
Less: Indicated cash shortage
Adjusted cash balance per accounting records

$20,600.00
1,245.00
$21,845.00
$ 400.00
524.00
176.00
5,000.00
6,100.00
$15,745.00
$35,400.00
6,255.00
$41,655.00
$ 130.00
15.00

145.00
$41,510.00
25,765.00
$15,745.00
^ Correct!

OSAGE FARM SUPPLY

Intentional Errors
Escola attempted to conceal the shortage by making
the following intentional errors in her reconciliation:
Errors leading to a $13,255 overstatement of
the adjusted balance per the bank statement:
Overstating deposit in transit with a transposition error
Improperly adding the amount of the note collected
by the bank to the bank balance
Making an addition error in adding adjustments to
the balance per the bank statement
Omitting check no. 8294 from the outstanding check list
Understating the sum of the outstanding checks listed
Error causing a $12,510 understatement of the adjusted
balance per the accounting records:
Subtracting the $6,255 amount of the credit memorandum
even though the caption stated that this amount should
be added
Total shortage concealed in Escola's bank reconciliation

900
6,255

1,000
5,000
100
13,255

12,510
25,765

Student Name: Instructor

Class: McGraw-Hill/Irwin
Problem 07-02
^ Correct!

Student Name: Instructor

Class: McGraw-Hill/Irwin
Problem 07-02
c. Suggest some specific internal control measures that appear to be necessary
for Osage Farm Supply.
Two weaknesses in internal control are apparent. First, the bank account should be
reconciled by someone with no other responsibilities for cash transactions, not by the
company's cashier. The person performing a control function never should have a
personal incentive to conceal the types of errors that the control procedure may bring to
light. Second, cash receipts are not being deposited intact in the bank, and
management is unaware of this internal control failure even after several months.
Failure to deposit receipts intact can be detected by comparison of the daily deposits
listed in the bank statement with the daily totals in the special journals used to record
cash receipts.

Given Data P07-02:

OSAGE FARM SUPPLY
Cash per accounting records at November 30
Deposit in transit
Cash per bank statement at November 30
Debit Memorandum: NSF check from G. Davis
Debit Memorandum: Bank service charges for November
Credit Memorandum: Proceeds from Regal Farms' note
Outstanding check: 8231
Outstanding check: 8263
Outstanding check: 8288
Outstanding check: 8294

$35,400.00
1,245.00
20,600.00
130.00
15.00
6,255.00
400.00
524.00
176.00
5,000.00

November Bank Reconciliation

Prepared by Bev Escola
Balance per bank statement, November 30
Add: Deposit in transit
Collection of note from Regal Farms
Subtotal
Less: Outstanding checks:
no. 8231
no. 8263
no. 8288
Adjusted cash balance per bank statement
Balance per accounting records
Add: Credit memorandum from bank
Subtotal
Less: Debit Memoranda from bank:
NSF check of G. Davis
Bank service charge
Adjusted cash balance per accounting records

$20,600.00
2,145.00
6,255.00

400.00
524.00
176.00

8,400.00
$30,000.00

1,000.00
$29,000.00
$35,400.00
6,255.00
$29,145.00

130.00
15.00

145.00
$29,000.00

Student Name: Instructor

Class: McGraw-Hill/Irwin
Problem 07-03
SUPER STAR
Accounts Receivable by Age Group

Not yet due

1-30 days past due
31-60 days past due
61-90 days past due
Over 90 days past due
Totals

Amount
$500,000
210,000
80,000
15,000
30,000
$835,000

Percentage
Estimated
Considered Uncollectible
Uncollectible
Accounts
1%
$5,000
3%
6,300
10%
8,000
20%
3,000
50%
15,000
$37,300

^ Correct!

^ Correct!

SUPER STAR
General Journal
Trans.
Date
Account Titles
no.
b. Dec. 31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts

c. Jan. 10 Allowance for Doubtful Accounts

Accounts Receivable (April Showers)

d. What advantages would there be to adopting a

policy requiring accounts receivable over 60 days
to have interest bearing notes on the balance?
Such a policy would compensate the company for
having to wait extended periods of time to collect its
cash. It also provides the company with additional
"leverage" in a court of law should it decide to press
charges against customers with delinquent accounts.

Debit
25,500

Credit
25,500

- Correct!

8,250

- Correct!

8,250

Given Data P07-03:

SUPER STAR
Accounts receivable aging:
Not yet due
1-30 days past due
31-60 days past due
61-90 days past due
Over 90 days past due
Totals
Uncollectible percentages:
Group a
Group b
Group c
Group d
Group e
Allowance for Doubtful Accounts
Worthless account receivable - April Showers

$500,000
210,000
80,000
15,000
30,000
$835,000

1%
3%
10%
20%
50%
$ 11,800
8,250